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Generic Supply Chain strategies for competitive businesses

Article written by: PhD. George Ogrinja, Supply Chain Director, Associate Professor Faculty of Economic Cybernetics, Statistics and Informatics, ASE Bucharest

Second part of the article: Which is the best Supply Chain strategy for my business?

2. The strategy of differentiation (Differentiation)  is the second generic strategy to a company’s competitiveness. It is based on the competitive advantages of a company compared to other similar companies of the market. A company can develop for its customers, products and services that have unique characteristics. Of course, in order for this strategy to be successful, the cost of developing these unique characteristics must be less than the cost of premium products, for which buyers of this segment are willing to pay however. The strategy of differentiation may lead to the development of the company’s capabilities in the field of design, manufacture, distribution of products or to increase the level of customer service.

Here are a few companies from various industries that apply the strategy of differentiation:

a)Amazon, the largest Internet retailer in the world to offer its customers a wide variety of products — books, DVDs, electronics and other goods — has established itself as the most trusted online retailer through an effective and secure strategies to achieve clients ‘ orders. Amazon sells products from extremely varied at very low prices, using its own innovative tools for online marketing and logistics.

For example, the delivery of eBooks using your e-book portable Kindle makes clear differentiation between Amazon and its competitors. Once bought, Amazon offers through Kindle, its personal and innovative product, free access to many online libraries of public information.

b)Samsung and Apple. These companies do not offer the cheapest products in the market, but offer to its customers in return for a short period of time the most popular products at least until the emergence of new products in the market.

c)Gazprom – is a company that has a single resource (product) with high user value (gas) and differentiates itself from other competitors with particularly large volumes of supply and its distribution network very extensive multinational.

3.The third generic strategy is „the strategy based on flexibility” (Responsiveness)  which offers customers products and services with high added value in a very short period of time but at relatively high operational costs.The ability of the company’s flexibility can be defined as “the ability to adapt quickly to changes in the market (Flexibility) and meeting the demands of clients in the periode of time set to (responsivness) increase or maintain competitive advantage in the market.

A very conclusive example of IT company which apply with priority “strategy based on flexibility” is DELL by its model of Supply Chain „DIRECT TO CONSUMER”. Dell enables a client to configure and personalize IT products on the site of the ecommerce platform. After completion, the client transmits online ORDER to DELL, it assembles the products according to the demand of the customer’s order and SHIPS them within a few days. We assist at mass production of configured customer’s individual demands and a very short customer response time (mass customization). For these reasons, Dell’s strategy is very flexible in relation to the client’s requirements.

Observation. I said earlier that the Best in Class company (BIC) adopt simultaneously two or even all three types of generic strategies of competitiveness for sustainable development of the business.

Why sustainable?

Stefan Mouzas (2006) suggestively shows in Figure 4 the graph of the correlation between Efficiency (Cost leadership) and Effectiveness (fast and flexible reaction to market changes) and the implications of unbalanced approach to these strategies.
According to the schedule, a unique strategy of Ledearship Cost type (high efficiency) based on decreasing costs, outsourced, lower marketing and development budget, reducing IT investments, etc leads on a relatively short period of time to increase operating profit (improving operational Margins).
The efficiency of a company is not a measure of successful in the market, it is a measure of operational performance and productivity.

Also, a unique strategy type Effectiveness, based on the opportunities of business growth, sustained by the high costs of compliance with the requirements of the market (new and innovative products, mass customization, high fluctuation of demands, etc) leads to an increase of unsustainable business.

supply chain management

Figura 1. Correlation between Efficiency (Efficiency) and flexibility (Effectiveness)

In addition, we mention that only a profitable growth is sustainable.
Elaboration of a strategy for the Supply Chain to make the company’s flexibility at the same time (rapid reaction capacity to changing market requirements) and effectiveness (reduced operational costs) is the goal of any COMPANY manager.

In addition, we mention that only a profitable growth is sustainable.
Elaboration of a strategy for the Supply Chain to make the company’s flexibility at the same time (rapid reaction capacity to changing market requirements) and effectiveness (reduced operational costs) is the goal of any COMPANY manager.

supply chain strategies

Figura 2. The efficiency vs. flexibility in the SC models

Traditional operational strategies have focused mostly on efficiency (low cost) or flexibility or a combination of both, that is a mix between efficiency and flexibility.

According to the table in Figure 5, in operational model based on efficiency (efficiency), the firm focuses on strategies for reducing costs across all functional departments. These departments cover: the selection process of suppliers, production, design and development of new products, distribution. Usually in such a strategy, production and distribution decisions are based on long-term forecasts, stock of finished goods is close to market demand and the selection of suppliers is based mainly on the criterion “lowest prices of acquisition of the goods or services”. Therefore, the main source of supply is the low-cost countries.

By contrast, the adoption by the company of a flexible strategy (responsiveness) focuses on short time and degree of achievement, level of serving and the degree of satisfaction of our clients. Here, the main objective of the company is to reduce operational costs, target objectives being focused rather on eliminating stock-out cases and meet demand from fast market.

Usually, we adopt a flexible strategy (responsiveness) when: portfolio of products is large, life cycle of products is short, production or assembly of products is carried out according to the actual demand of the client and less on forecasted demands, products can be customized, it forms a safety stock of items that compose personalized products and selection of suppliers, sources and transport strategies are based on most of the times the speed of response to the company’s cost-cutting than requests.

In the graph of Figure 6, Dr. David Simchi-Levi from Massachusetts Institute of Technology (MIT) presents a compromise that the company must make between efficiency and flexibility. According to the schedule, if the current strategy competitiveness of the company moves only on large, outer curve, increasing the flexibility (responsiveness) enables both increase operating cost and response time to meet client requirements.

supply chain management

Figura 3. The Trade-off Between Efficiency and Responsiveness

Another alternative to the current strategy (A) is devising a new strategy to push the company’s strategic border down. If this is possible, then for the same level of efficiency (efficiency), you can improve response time (point B). Alternatively, for the same level of responsiveness (responsiveness), you can improve the efficiency of operations and therefore reduce costs (point C). But what is more important, there are a number of strategies between B and C where the company can improve both the operating efficiency and response time to customer requests.

So, using a balance between both corporate strategies (Efficiency, Flexibility) the whole curve will descend in the direction of intersection of the axes to provide generally better company performance (direction of improvement).

Carrying out of operations affects three performance criteria: cost, time and level of service. Unfortunately, as illustrated in Figure 6 above they are conflicting goals, discontinuous curve in the graph being the compromise between Efficiency and Flexibility by which any SC Manager should solve it. This curve sometimes referred to as the efficient frontier, represent a range of possible strategies, each strategy has a cost (efficiency) and response time (responsiveness). Indeed, a high level of efficiency, a strategy to reduce operational costs increase usually time serving clients and reduce the level of servicing. Alternatively, a flexible strategy (responsiveness) increases the cost of serving but reduces the time of serving the customer.

There are many correlations defining the structure and finally the features of a model Supply Chain able to sustain the competitiveness of the company’s strategy or Supply Chain, such as correlation (cost, time serving; stock level, level of servicing), etc. All of this will be presented at the right time in designing a competitive COMPANY.

Next: Third Part: How does the company strategy influence the Supply Chain Model?


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